JEDDAH, 29 June 2007 — The sharp rise in oil prices since 2001 had provided Gulf Cooperation Council (GCC) countries with huge cash flows that had not only tremendously transformed their economies but also witnessed major cross-border corporate takeovers.
Based on the latest HSBC Global Research report on chemical industry, a copy of which was sent to Arab News, it said GCC oil export earnings from 2002 to 2006 was estimated at $1.5 trillion, and the massive capital inflows have led to a sharp rise in mergers and acquisitions (M&A) activity by GCC firms, with the petrochemical sector in particular being an area of focus for cross-border transactions.
Market access for basic chemical products, as well as portfolio diversification and technology access, have been the key drivers of M&A by regional strategic investors, highlighted for example, by SABIC’s purchase of GE Plastics and Huntsman’s European commodity chemical assets, and Tasnee/Cristal’s purchase of Lyondell’s titanium dioxide assets, the report said.
“We believe that the strategic rationale for further involvement of GCC-based firms in cross-border chemical M&A remains strong, while the ability of firms to finance large transactions is set to grow further, given the strength of capital flows and cash generation from new projects,” the report pointed out. It moreover forecast an increased involvement by GCC-based firms in chemical M&A over the next few years, saying that the “European chemical industry in particular appears to be the likely M&A destination, given the fragmented market structure and the bias toward asset disposals and restructuring.”
The report explained that the rationale for acquisitions was based on market access, diversification into specialty chemicals, and access to technology to strengthen, as more basic chemical projects come on stream in the Middle East. “Firms with cost-advantaged feedstocks and concentrated commodity portfolios should look to use the strong cash flow generation from their basic chemicals businesses to grow inorganically,” it said.
Based on our cash margin assumptions for Middle East ethane-based producers, it estimated that a world-scale olefins project in the Middle East could generate up to $500 million in cash margins annually.
Of the strategic players, the report further said, SABIC and the Al-Zamil Group — which owns majority stakes in Sahara Petrochemicals and Sipchem — “appear to have the greatest appetite for cross-border deals, given the evidence of recent M&A transactions. We expect both companies to transition to a significantly higher cash flow base once their new petrochemical projects start up over the next few years, equipping them for further acquisitions.” Interest in chemical assets is unlikely to be restricted to strategic bidders from the GCC region, with private equity firms also potential bidders.
HSBC report noted that the European specialty chemical industry, particularly the coatings, fine chemicals, and additives segments, is highly fragmented. In light of ongoing portfolio restructuring initiatives by companies such as Akzo Nobel, Ciba, Clariant, for instance, “we expect there to be acquisition opportunities for Middle Eastern firms seeking to gain a foothold within specialty chemicals.”
Given the increasing influence of Middle Eastern companies across the basic chemicals value chain and a raft of olefins, polyolefins, and stirenics projects expected to start up over the next few years, chemical companies in the region have started to explore M&A as a route to gaining market access for their products. The blueprint for the M&A route to market access is based on SABIC’s acquisition of DSM’s petrochemical assets in 2002. The DSM acquisition enabled SABIC to gain a foothold within the European region and leverage the platform to ramp up exports of products from its low-cost production bases into Europe.
“We believe further acquisitions by Middle Eastern chemical companies, with the intention of gaining market access, are likely, particularly in Europe and Asia, given the fragmented industry structure and that these regions tend to be the natural home for Middle Eastern exports, taking into account logistical considerations,” the report said.
Broadening the product portfolio, access to technology SABIC’s acquisition of GE Plastics broadens its portfolio into specialty polymers, diversifying the company into higher-value-added products on a base that is close to its core expertise in plastics.
Other leading polycarbonate and ABS producers, Dow and BASF, are also major polyethylene and polypropylene producers, and the move downstream is a logical extension of the company’s existing portfolio, in our view.
The GE Plastics acquisition gives SABIC access to polycarbonate technology as well.
useful for the Saudi Kayan petrochemical complex (in which SABIC has a 35 percent share), which is due to start up in 2010. The Kayan complex is slated to have a 240ktpa polycarbonate plant, which is likely to benefit from GE’s technology, as well as an integrated marketing approach to the existing customer base. The GE Plastics acquisition provides feedstock synergies, as SABIC, through its European assets, is estimated by Chemical Market Associates, Inc. (CMAI) to be about 450,000 tons of benzene, which is a key raw material for polycarbonate production.
With crude oil prices having roughly tripled from their levels in the early part of the decade, GCC countries have received windfall profits with record export revenues and budget surpluses. Rising export earnings and increased budgetary surpluses is a pattern visible across the GCC, with the combined export earnings of the states averaging more than $300 billion per year between 2002 and 2006, more than double the average annual export earnings of $140 billion between 1998 and 2002, the report noted.
On an aggregate basis, the central government fiscal surplus is forecast to stand at the equivalent of more than 20 percent of GDP by the end of 2007.
Furthermore, although the regional average masks some divergence in trends, HSBC’s Middle East economists expect that there will be no fiscal deficits within the region and that the smallest surplus, forecast for Bahrain, will equate to well over 10 percent of GDP. Kuwait will generate, HSBC expects, a gross surplus of over 30 percent of GDP. The year 2007 is forecast to be the fifth-consecutive year in which no Gulf state will record a gross deficit (i.e. allowing for income kept off balance sheet by countries such as Kuwait).
The surplus trend in government finances has also been replicated in current account balances across the GCC region. As with public finances, there have been no trade or current account deficits since 2002.